REQUIRED 1. Prepare in good form a classified comparative balance sheet, and a multi-step single…

Oxcom Enterprises:
A Case of Cash-Based to
Accrual Accounting

Abstract

The importance of students understanding the process
of converting cash based accounting information to accrual-based accounting
financial statements cannot be emphasized enough. This concept is introduced in the first
financial accounting class and then expanded upon in the first intermediate
accounting class. Oxcom Enterprises is a
typical small business that maintains limited financial records and relies on
its accountant to accumulate this information into accrual based financial
statements at year-end. The case
requires the student to use the prior year financial statements and some
additional information to create the adjusting entries and prepare the
financial statements. Students also
receive practice in the use of the accounting work sheet. The case format is flexible and can be easily
expanded to include, or exclude particular facets. The case format here includes a lease type
transaction, an indirect method statement of cash flows but excludes issues
relating to deferred taxation. It also
includes a requirement to draft in appropriate format the footnote for long
term debt.

OXCOM
ENTERPRISES INC.
Oxcom Enterprises Inc.
(Oxcom) sells personalized items such as mugs, key chains and plaques to the
public. The company was started by two high school friends 8 years ago. Oxcom was organized by issuing 40,000 shares
of $0.25 par stock to a number of investors. At that time they also obtained start-up
capital from a loan from a financial institution. During the current year they have sought
further capital by issuing an additional 10,000 shares to new investors.

Like many small
companies, Oxcom is required to prepare accrual basis financial statements at
the end of the year for submission to its bank and to stockholders. Because of the size of the company and the
fact that it does not have an accountant on its payroll, Oxcom has maintained simple
records of its transactions based on the cash basis of accounting. They have come
to you as an accountant for assistance and have provided you with a box of
records containing that contain the information necessary to record the
transactions that occurred for the year.
These records should provide enough information to prepare a worksheet
summarizing the year’s transactions and adjusting journal entries necessary to prepare
the financial statements for the 2013 fiscal year. From the 2012 accounts of Oxcom Enterprises that
were filed with the bank you have obtained the following audited balance sheet
(post closing trial balance) as of December 31, 2012.

Dr.

Cr.

Cash

$56,000

Accounts receivable

13,000

Inventory

32,000

Prepaid insurance

900

Land

40,000

Buildings

50,000

Accumulated depreciation –
buildings

$15,000

Equipment

32,000

Accumulated depreciation- equipment

6,000

Accounts payable

27,400

Advances from customers

1,100

Salaries payable

2,100

Taxation payable

5,000

Interest payable

1,200

Long term loan payable

60,000

Capital stock $0.25 par

10,000

Paid in capital

16,000

Retained earnings

80,100

$223,900

$223,900

From an analysis
of the company’s 2013 bank account and related vouchers and invoices you have
determined the following:

Cash receipts:
Sales and other collections from customers $331,200
Proceeds from sale of equipment 5,000
Issue of 10,000 $0.25 par shares 12,500
Interest income 1,200
Total cash receipts $349,900

Included in cash collections is a deposit of $4,800
made by a customer for a job to be performed in 2014. The jobs relating to the 2012 deposits in advance
were completed in 2013.

The proceeds from sale of equipment arose from the
sale of a piece of equipment on December 31, 2013. The original cost of the equipment was $6,000,
and the accumulated depreciation on this equipment at the start of the year was
$3,000.

Cash disbursements:
Payments relating to purchase of merchandise $163,000
Extension to building 11,000
Payment for purchases of equipment 10,000
Payment of salaries and wages including payroll taxes 88,600
Payment of utilities 4,600
Payment of telephone 3,400
Payment of insurance bills 1,500
Payment of interest and principal on bank loan 14,600
Van payments 11,000
Payment of dividend to shareholders 11,000
Payment for income taxes including tax deposits 13,400
Total disbursements $332,100

You also have determined
the following facts:

1. At December 31, 2013 the outstanding
accounts receivable totaled $30,000. In prior years, uncollected accounts
receivable have been small and the company used the direct write-off method for
bad debt. However, Oxcom has started to
offer more credit in an attempt to bring in more corporate business. At December 31, 2013, 10% of the outstanding
accounts receivable are considered to be doubtful as to collectibility.

2. Merchandise inventory at December 31, 2013
was counted and valued at cost of $51,500.

3. The insurance policy paid during the year
covered the period from September 1, 2013 to August 30, 2014. The prior year payment covered the earlier
part of the year.

4. Accounts payable at December 31, 2012 and 2013
were $25,400 and $21,200, respectively.
An analysis of these accounts payable balances revealed the following:

Relating to 2012 2013
Merchandise
purchases 24,000 20,000
Equipment 2,000 –
Telephone 500 400
Utilities 900 1,800
27,400 22,200

5. Accrued salaries and wages at December 31, 2013
are to be established on the following basis.
Payroll was paid for the two weeks to December 26, 2013 on December 28, 2013. Payroll for the two week period to January 9,
2014 was paid on January 11, 2014. The
total of this payroll and employees benefits was $14,000. (Assume a seven day work week)

6. Depreciation of the original buildings is
on a straight-line basis assuming a 25-year useful life with no residual value.
Depreciation on the building extension
is to be over a remaining life of 18 years.
Depreciation of equipment and vehicles is on a straight-line basis
assuming a 5-year useful life with no residual value. A half year’s depreciation is taken on assets
acquired or disposed of in the current year.
No assets are fully depreciated by December 31, 2013.

7. The loan principal on the 8% fixed rate
bank loan will be repaid in ten equal principal payments (12 from the start of
the year) of $5,000 every six months on March 31 and September 30 each year
plus the accumulated interest for that period based on the outstanding
principal balance.. The principal
payments and the correct amount of interest have been paid so far on the due
dates. The next principal payment is due
on March 31, 2014. The loan is secured
on the land and buildings of the company.

8. On June 30th of the current
year, the company purchased a delivery van.
It made a down payment of $3,000 on the date of purchase and financed
the balance of the vehicle with the vendor.
Oxcom will make eight quarterly payments of $4,000 each commencing
September 30, 2013. A reasonable market
rate of interest on this loan would be 10%.
The September and December payments were made on the due dates. The loan is secured on the delivery van. You
will have to determine the cost price of the van and how to deal with the loan
finance.

9. The issue of shares occurred on June 30 .2013.

10. Taxation at a rate of 30% of net profits
before tax is to be provided for.
Deferred tax is not applicable to this case.

11. All matters above are deemed to be
material.

REQUIRED
1. Prepare in good form a classified comparative balance sheet, and a
multi-step single year income statement and statement of stockholders’ equity
for Oxcom Enterprises for the 2013 year.

In order to achieve this you must perform this exercise in an excel
spreadsheet formatted and linked as you wish.
The following is a suggestion:
(a)
Enter the opening balances for 2013
into a multi-column Excel spread sheet (work sheet) using the following column
headings:
1.
Account
2.
Opening Trial Balance)
3.
Adjustments (with columns for
Dr and Cr)
4.
Corrected Trial Balance

(b) Post the necessary entries to the work sheet to record the cash transactions
for the year (adjustments column). Keep
a separate record of the journal entries posted with a brief explanation in a
general journal.

(c) Post the necessary entries to the work sheet to record the
adjustments to the accounts needed to prepare the financial statements
(adjustments column). Keep a separate
record of the journal entries posted with a brief explanation in general
journal.

(d) Prepare the financial statements from the worksheet.

This
spreadsheet must be available for my review if requested.